R&D tax changes back on the table


Denham Sadler
Senior Reporter

The federal government has put its changes to the research and development tax incentive (RDTI) back on the table, with plans to shave $1.8 billion from the scheme.

Treasurer Josh Frydenberg introduced legislation to the Parliament on Thursday morning, the last sitting day of the year, making a series of changes to the R&D tax incentive largely in line with its budget announcement last year.

The RDTI currently provides a 43.5 per cent refundable tax offset for companies with turnover of less than $20 million annually, and a 38.5 per cent non-refundable offset for larger companies, with a $100 million expenditure threshold.

Karen Andrews
Karen Andrews

The new legislation introduces an increased expenditure threshold to $150 million, a $4 million cap for smaller companies claiming the tax offset and the introduction of an “intensity measure” to calculate the size of the offset for larger companies.

The Coalition has been planning to give the RDTI a haircut for several years, with a review commissioned in 2016. It announced its planned changes as part of the 2018 budget, with legislation introduced to Parliament at the end of that year.

But this legislation was sent back to the drawing board by a Senate committee in February, citing concerns about the changes being applied retrospectively, and further issues with the intensity threshold.

The proposed changes received widespread criticism, with some observers saying the changes could lead to companies relocating overseas, and reducing the amount of R&D conducted in Australia.

The plan to cut the popular RDTI scheme has also come at a controversial time, with Australian business investment in research and development falling at a troubling rate.

With the new legislation, the government has made some minor refinements that fall largely in line with the senate committee’s recommendations, with the changes now delayed to the 2019-20 financial year, and a different way of calculating the intensity threshold.

The government plans to save $1.8 billion thanks to the legislative changes, down from $2.4 billion it outlined in the 2018 budget. It estimates that the changes will lead to regulatory costs for business of $26.3 million.

In a joint statement, Mr Frydenberg and Innovation Minister Karen Andrews said the changes are an effort to ensure taxpayers’ money is “well targeted by encouraging companies to invest a higher proportion of business expenditure on R&D”.

“We are committed to backing R&D investment and the economic opportunities and jobs it generates. The RDTI remains an important part of the government’s support for innovation. It is crucial that funding provided is fiscally sustainable and encourages business to back themselves to be a key driver of new ideas, products, services and jobs,” they said.

“These reforms are an important step in supporting private investment in research and development and enables Australian businesses to create more and better paying jobs whilst remaining globally competitive.”

The legislation lifts the R&D expenditure threshold from $100 million to $150 million and links the tax offset to the claiming company’s corporate tax rate.

For smaller companies with annual turnover less than $20 million, the refundable offset will be 43.5 per cent, with the total offset capped at $4 million. Clinical trials will be made exempt from this cap.

The new cap will hit 20 smaller companies claiming the RDTI. Profitable SMEs will see their tax offset reduced from 16 per cent to 13.5 percent due to the linkage with the corporate tax rate, while unprofitable SMEs will be hit with a 2.5 percent reduction, according to government figures.

For larger companies with annual turnover over $20 million, the size of the R&D tax offset will be calculated using the new intensity measure. This will be calculated by dividing the company’s R&D expenditure by its overall total expenses, instead of its total expenditure as the government had previously planned.

There will be three tiers for this threshold, down from the four originally proposed. Companies with a 9 percent intensity measure or more will score a 12.5 percent tax offset.

About 1,030 companies, or 65 per cent of claimants, accessing the non-refundable tax offset would have an intensity measure of less than 4 per cent, meaning their offset will be reduced as a result of this legislation.

The new measure will provide a “higher premium for initial R&D investment while rewarding those companies that commit a greater proportion of their business expenditure to R&D”, the government said.

The legislation also includes a number of new measures to “enhance the integrity” and improve the administration of the RDTI.

Included in these are changes to clawbacks and feedstock adjustments, a two-year delay in having to publish RDTI claims publicly and new powers for Innovation and Science Australia (ISA) to provide guidance on the application of the scheme.

ISA will be given new powers under the changes, with the ability to make determinations publicly stating its position on the application of the scheme and its interpretation of the legislation, such as on the definition of eligible activities or clinical trials.

This will likely include how it plans to assess software claims, which have been clouded by uncertainty in recent years.

“This is intended to make compliance easier for R&D entities, as they will be able to better understand what is required to demonstrate eligibility for the RDTI,” the legislation said.

ISA will also be able to delegate its powers around the RDTI to any member of the Australian Public Sector, with an inability to do this currently presenting an “impractical and significant barrier”.

Information regarding a company claiming the RDTI’s name, ABN and the amount claimed under the scheme will be made public two years after the claim is made.

“This will improve public accountability for R&D claimants and encourage voluntary compliance with the program while balancing these objectives against the potentially commercial sensitive nature of the information being published,” it said.

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